Global Market Perspective | Q3 2015

Real Estate Markets Thrive despite Economic Headwinds

Global real estate markets at a glance

Investment Volumes

Office Vacancy Rates

Capital Value Growth

+9% y-o-y

12.5%

+7.6% y-o-y

Investment and occupational markets move in tandem

Momentum continues to build in the world’s major commercial real estate markets and, for the first time in the current cycle, growth in leasing activity has matched that of investment. Significantly, office leasing volumes are at their highest level for more than three years, with healthy uplifts recorded across all three global regions. Meanwhile, investor appetite for real estate shows no signs of abating, with a potential Grexit, China stock market volatility and expectations of rising U.S. interest rates doing little to knock real estate investment off its stride.

Investment and occupier markets are more aligned

Source: JLL, August 2015

Investors push yields to new lows

Investment activity has continued to expand vigorously. Volumes during the first half of the year, at US$177 billion, were 9% up on H1 2014 and an impressive 19% higher when denominated in local currencies. Larger single-asset and portfolio deals are now a regular feature of the dominant markets. The weight of money is still pushing yields to new lows, with yields compressing at their fastest pace for five years.

The U.S. has been the standout investment market, with year-to-date volumes increasing 29% on 2014. Germany and the UK have also registered a strong first half of the year, while China has bounced back robustly during Q2. Investor demand is high in Australia and Japan, but activity in these markets has been constrained by a lack of product.

The ‘Super Cities’ shine

Investor demand for prime assets in the ‘Super Cities’ has reached new heights, with New York and London having their busiest first half of the year since 2006, accounting for a record 15% of global activity. Their scale, liquidity, transparency and ‘safe haven’ attributes are attracting significant capital from sovereign wealth funds, global institutions and HNWIs.

Highest leasing volumes for more than three years

Office leasing market fundamentals made a significant rebound during Q2, with volumes up 8% year-on-year and at their highest level for more than three years. Asia Pacific has seen leasing activity grow by 41% year-on-year; Europe recorded its strongest Q2 since 2008; and U.S. volumes are at a two-year high. Technology continues to drive demand across the globe – from Bangalore to Berlin, Los Angeles to London, and San Francisco to Sydney.

Vacancy rates are still falling steadily, yet the current global office vacancy rate, at 12.5%, masks a significant supply squeeze in many CBD markets. Corporate occupiers are focusing on markets that have density, amenity, authenticity and a diverse mix of office inventory. The development pipeline is rising, but it is unlikely to provide substantial relief until well into 2016.

Rental growth of 4% is projected for the full-year 2015 across major office markets. London is currently recording the fastest rental uplift at close to 12% year-on-year. Hong Kong and Tokyo are forecast to be the star rental performers during 2015. Several U.S. markets have the potential to see a sharp increase in rents during the second half of the year.

Consumer optimism boosts retail sales

Reduced fuel and energy prices, decreasing unemployment and lower interest rates are boosting disposable incomes across the globe. Retail sales are improving in Europe, with Northern European cities in particular showing robust expansion in retail rents. The pace of improvement in the U.S. retail market is much more gradual – but it continues to strengthen nonetheless. In Asia Pacific, new-to-market foreign retailers and the growth of inbound tourism (particularly Chinese) are supporting many markets around the region.

Realignment of logistics networks heightens demand

Continued innovation in order fulfilment and delivery is driving further adaption of logistics networks and heightening demand in multimodal locations, for automated facilities and for facilities supporting efficient urban logistics. Demand is also being boosted by a strengthening manufacturing sector. In the U.S., absorption is still outpacing new supply and vacancy rates remain low. Likewise, vacancy is very low in Europe, but here speculative development is, as yet, extremely limited.

Global hotel investment going from strength to strength

Global hotel transaction volumes have gone from strength to strength, reaching a new high of US$42 billion in H1 2015, up 55% from the same period last year. Europe continues to be a magnet for foreign investment in hotel assets. Investors from the Middle East and mainland China have been the major exporters of capital.

Robust appetite for institutional-grade residential product

Demand for institutional-grade residential product continues apace in many markets across the globe. In the U.S., multifamily investment sales momentum exceeds the 2007 peak; volumes are at record levels in Germany; and there is growing investor appetite for institutional-grade rental product in the fledging UK market. Policy restrictions remain in place in various Asian residential markets, but sales activity is slowly increasing and China has relaxed its down-payment rules for buyers of second homes. Dubai has seen a notable decline in residential sales, but falls in prices have been modest. Australia is also showing signs of capital growth moderation.